Stericycle Management Discusses Q2 2012 Results - Earnings Call Transcript

Jul.25.12 | About: Stericycle, Inc. (SRCL)

Stericycle (NASDAQ:SRCL)

Q2 2012 Earnings Call

July 25, 2012 5:00 pm ET

Executives

Laura A. Murphy - Vice President of Corporate Finance

Frank J. M. Ten Brink - Chief Financial Officer, Chief Accounting officer and Executive Vice President of Finance

Richard T. Kogler - Chief Operating Officer and Executive Vice President

Charles A. Alutto - Executive Vice President and President of Stericycle Usa

Analysts

Ryan Daniels - William Blair & Company L.L.C., Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Scott J. Levine - JP Morgan Chase & Co, Research Division

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

James Francescone - Morgan Stanley, Research Division

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Gregory W. Halter - LJR Great Lakes Review

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

Operator

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Stericycle Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Laura Murphy, Vice President of Finance, you may begin your conference call.

Laura A. Murphy

Welcome to Stericycle's quarterly conference call. Joining me on today's call will be Frank Ten Brink, CFO; Rich Kogler, COO; Charlie Alutto, CEO-elect; and Mark Miller, Chairman and CEO. I will now read the Safe Harbor statement. Statements by Stericycle in this conference call that are not strictly historical are forward-looking. Forward-looking statements involve known and unknown risks and should be viewed with caution. Factors described in this company's Form 10-K, 10-Qs, as well as its other filings with the SEC, could affect the company's actual results and could cause the company's actual results to differ materially from expected results. The company makes no commitment to disclose any revisions to forward-looking statements or any facts, events or circumstances after this date that may bear upon forward-looking statements.

I will now turn it over to Frank.

Frank J. M. Ten Brink

Thanks, Laura. The results for the second quarter are as follows: Revenues were $468.9 million, up 14.3% from $410.4 million. In Q2 of 2011, an internal growth excluding returns and recall revenues was up 8%. Domestic revenues were $337.9 million of which $308.9 million was domestic regulated waste and compliance services revenues, and $29 million was returns and recalls. Domestic internal growth, excluding returns and recall revenues was up 9%, consisting of SQ, up 10%, and LQ, up 8%; International revenues were $131.1 million and internal growth, adjusted for unfavorable exchange impact of $8.1 million, was up 5%. Acquisitions contributed $36.6 million to the growth in the quarter, of which $2.7 million related to the Recalls and Returns business.

Gross profit was $209.5 million, or 44.7% of revenues. SG&A expense was $88 million or 18.8% of revenues. Net interest expense was $12.7 million, and net income attributable to Stericycle was $67.6 million or $0.78 per share on an as-reported basis, and $0.81 adjusted for acquisition and other non-recurring expenses.

Now the balance sheet. At the end of the quarter, the revolver borrowings were approximately $516 million. The unused portion of the revolver debt at the end of the quarter was approximately $328 million. Our capital spend in the quarter was $16.8 million. And our DSO was 58 days. Q2 year-to-date, the cash provided from operations was $188.8 million, which includes $9 million of cash received in the second quarter from a customer to be used for recall product reimbursement. I will now turn it over to Rich.

Richard T. Kogler

Thanks, Frank. Worldwide, we continue to use our strong free cash flow to drive our grow-through acquisitions. In the quarter, we closed 8 transactions, 3 domestic and 5 international. Our worldwide acquisition pool remains robust with over $100 million in annualized revenues in multiple geographies and lines of business. At the end of the quarter, we had approximately 535,000 accounts, of which over 519,000 were Small and the remainder were Large. Our customers continue to be excited about our expanding portfolio of services. For our SQ customers, these services include Steri-Safe and clinical compliance offerings. And for our LQ customers, the growth drivers are Sharps Management, Pharma Waste and Integrated Waste Services. The strong growth we experienced in the quarter was fueled by the continued adoption of these additional service offerings.

We remain very excited about our future growth opportunity because 80% of our LQ and 70% of our SQ customers only use one of our current service offerings. As customers adopt our multiple services, this can more than double or triple their revenues. For 2012, we anticipate internal growth rates for SQ to be at 8% to 10%; LQ, 5% to 8%; International, 5% to 8%; and Recall and Returns revenues between $110 million and $120 million.

We want to thank each member of our worldwide team for their strong performance and continued commitment to our customers and shareholders. A special thanks to our Spanish team for their great cash collections efforts in the quarter. I'll turn it over to Charlie.

Charles A. Alutto

Thanks, Rich. I would now like to provide insight on our current outlook for 2012. Please keep in mind that these are forward-looking statements. Revenues from acquisitions completed in the quarter were approximately $3 million and annualized are approximately $41 million. Keep in mind our guidance does not include future acquisitions, divestitures and acquisition expenses.

For 2012, we believe analyst EPS estimates will be in the range of $3.26 to $3.29, which we are comfortable with. We believe analyst revenue estimates for 2012 will be in the range of $1.86 billion to $1.9 billion, depending on assumptions for growth and foreign exchange rates. We believe analysts will have estimates for free cash flow between $322 million to $330 million, with CapEx anticipated between $63 million to $65 million.

In closing, we are very pleased with our Q2 results and excited about the multiple growth opportunities for 2012 and beyond. Thank you for your time today. We'll now answer any questions. Mike, you can open up the Q&A queue.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ryan Daniels from William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Yes, let me get a couple of quick housekeeping out of the way. Frank, can you walk us through the gross margin performance during the quarter, going through some of the various puts and takes that moved that up and down with FX and mix shift and acquisitions?

Frank J. M. Ten Brink

Yes. So we ended the last quarter at 44.6%. The Large retail and healthcare contracts that we also talked about last had about a 0.2% negative impact. Foreign exchange was about an 8 basis points positive. And then growth in the business and other factors added about 0.2% and that gets you to your 44.7%.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, perfect. And then any more color on the M&A activity? It sounds like not a lot of contribution this quarter, but a pretty good acquired run rate. I'm curious, you can go through internationally and maybe where those are located, and then in the U.S., the 3, are those Medical Waste, Patient Communication, any color there?

Frank J. M. Ten Brink

So there is 8 acquisitions, there were 3 domestic, 5 international. The international ones, there were 3 in Spain, 1 in the U.K., 1 in Argentina. And then of the $41.6 million in the -- that was the total for annualized revenue. In total there were 6 regulated waste and 2 PC, Patient Communication deals.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, perfect. And then you mentioned the strong collection efforts in Spain. I'm curious outside of FX headwinds you saw. Are you having any issues with the macro storm over there, be it collections or slowing organic growth? Just kind of what's the outlook for the International operations at Stericycle?

Frank J. M. Ten Brink

So we had a very good collection quarter in Spain, which resulted in our DSO coming down 2 days. Spain is performing totally on track. They've completed, as I mentioned, 3 additional acquisitions in Q2. On the overall European marketplace, we do think that the assets that potentially are available, that's positive in a turbulent market, that may become for sale and it gives us an opportunity. And I think Spain is a good example of that. We see opportunities into new services. Overall, the volumes are fairly steady and our multiple services strategy is helping us reduce cost for our customers.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, perfect. And then the last one, I'll hop off into the queue. Health care waste solutions, I know we're anniversarying that in the second quarter with the year since it's being closed. I think you've had somewhat of an approach to be more hands-off on cross-selling and up selling within the first year. So I'm curious now that you've anniversary-ed that, is it helping drive growth in the LQ where you're selling more into that customer base?

Frank J. M. Ten Brink

Yes, and so Healthcare Waste Solutions on track, did perform as to the synergies that we thought out of that transaction. Cross selling started there probably a little bit sooner, but they already had a strong cross sell with there own resource management tool that we have now blended with ours, so it's a little bit less of a timing thing there.

Operator

Your next question comes from the line of Al Kaschalk from Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Just a fairly softball question actually. In the first quarter's Q, you disclosed a deposit for a pending acquisition, was that utilized in the quarter? Or applied in the quarter? Or where -- what did that relate to?

Frank J. M. Ten Brink

No, we had a small escrow there. It's associated with the future acquisition. It has yet closed at this time. It's not that material.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Right, understand. And then just to clarify, the acquisition revenue in the quarter was what?

Frank J. M. Ten Brink

$3 million. So the deals we closed in the quarter contributed $3 million to the revenues.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay, and then on the press release though, that was last year, the $36 million, is that right?

Frank J. M. Ten Brink

That's year-over-year, yes.

Operator

Your next question comes from the line of Todd Levine from JPMorgan.

Scott J. Levine - JP Morgan Chase & Co, Research Division

It's Scott Levine. So my question with regard to the margins which trended up sequentially on a gross basis. I'm not sure if you had mentioned this in response to an earlier question, but do you have the fuel as a percent of revenue or maybe an indication as to how much of a beneficial impact that was?

Frank J. M. Ten Brink

I think fuel as a total maybe contributed about 0.1% favorably to the overall gross margin. If you look at it on a pure measurement on those parts of the business that are energy and fuel dependent, we went from 5.8% to that revenue to 5.6%, but that is not all the revenues within the company.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Okay. And did you give the leverage calculation of debt to EBITDA?

Frank J. M. Ten Brink

Debt to EBITDA was at 2.33. And there again, we have our average cost of ForEx right now at about 3.4%. Again with long-term fixed-rates continuing to get lower, we really also continue to evaluate to term some of that debt out maybe in the future.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Got it. And can you give us of the size of all the acquisitions you've done recently in Spain? How large is the revenue base there, roughly at this point?

Frank J. M. Ten Brink

We don't break out individual countries. It is part of our segment called Europe as a whole.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Got it. And then anything new with respect to the Ecowaste divestiture?

Charles A. Alutto

Yes, on the Ecowaste divestiture, based on the CC ruling, we are in the process of divesting that asset. We expect to complete that by the end of the third quarter.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Rough idea of how much revenue associated with that?

Charles A. Alutto

If you think on the revenues associated with that, it was immaterial, it was GBP 1.8 million on the revenue side.

Operator

Your next question comes from the line of Scott Schneeberger from Oppenheimer.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

On, I think you said 2 acquisitions in the quarter in Patient Communication. Sorry, could you give us an update? I got the sense that this year was going to be a feel out for integration and how well, how quickly you could ramp that up. Could you just give us a progress report there?

Charles A. Alutto

Yes, I mean we continue in 2012, as you know, to build out that platform. Add some service capabilities and continue to look at how we can sell this to our current customer base, and at the same time how do we integrate these acquisitions that we required over time. Still early. We remain excited about the opportunity, though.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Okay, great. I mean, should we anticipate a greater mix of acquisitions in the near term, or is that something a little bit farther out?

Frank J. M. Ten Brink

I would stay put on that, I mean, you'll see.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Okay. Comments on recall in the quarter, it was above what we were expecting. Could you just give us a feel for what the environment is right now and are there any big projects that may trickle into the coming quarter?

Frank J. M. Ten Brink

No, our guidance is 110 to 120, so the same. So the expectations are still the same as the last quarter. It's a business where you don't totally know yet what next quarter is, but we feel that the business keeps running as expected according to that guidance.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Great. And then lastly, this Alameda County vote and the implications of a potential ordinance to tell pharmaceutical companies that they'd have to pay to get rid of pharmaceuticals. Could you just give us your thoughts on, I think that was unprecedented, and if this becomes a norm, if this is something that gets pursued, what are your views on how it might affect your business?

Charles A. Alutto

Yes, Scott, as you know, first of all, in the pharmaceutical waste opportunity, we focused on the hospital market, a little bit on the SQ market. We monitor the household pharmaceuticals, the ordinance that you're referring to in California, that's not unique. There's been some talk around the country, in some states and also some municipalities to implement that and hold the pharmaceuticals accountable to pay for that proper disposal. I think it's too early to tell if that will become a trend or not. Obviously, the more regulations that come around household pharmaceutical, it could become an opportunity for us in the future, but right now our focus has been on our core business, which is the LQ and the SQ side.

Operator

Your next question comes from the line of Erin Wilson from Bank of America.

Erin E. Wilson - BofA Merrill Lynch, Research Division

A quick question on Patient Communications. Do you ever plan on, I guess, breaking that contribution out on a quarterly basis, I guess, when it comes to some sort of critical level?

Frank J. M. Ten Brink

It's not material yet for us to break it out, and again, there's pretty straightforward SEC rules when something is material, and then it will be.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay. And I noticed that Sharps Compliance launched their web-based OSHA Compliance on blood-borne pathogens training program, is there any sort of -- do you have any concern, I guess, about that or to -- are you seeing others out there that are their bolstering up their ancillary services offerings?

Charles A. Alutto

Yes, there's been a lot, I mean over the years many companies have offered a compliance program, so we don't see the market changing all that much. We saw that as well, but that's been ongoing from different competitors around the market place. We continue to look at our program, make enhancements to it. Our program looks a lot different every year by adding additional services and capabilities to our own program.

Operator

Your next question comes from the line of David Lewis from Morgan Stanley.

James Francescone - Morgan Stanley, Research Division

It's actually James in for David. First just a question on operating margin and how you're expecting those to trend through the rest of the year. For the first half of 2012, it looks like EBIT margins are down around 70 bps year-over-year. I haven't had quite had the time to run the calculations on what your guidance for the back half implies, but it does sound like you're expecting some improvements. What would be the big drivers there?

Frank J. M. Ten Brink

I think, obviously our continued drivers are selling services that have higher margins, making the improvements on acquisitions that we've made from a synergistic point of view. The guidance on the gross margin level is sequentially about 10 to 20 basis points improvement quarter-over-quarter. In Q3, there's not a lot of change with respect to that because the acquisitions that we did in the prior quarter don't have really a changing effect on that trend. If you look at overall the SG&A levels, they probably are going to stay fairly close to the level we're at right now, coming down slightly between now and the end of the year.

James Francescone - Morgan Stanley, Research Division

Okay, that's helpful. And then a question on tax, could you break out what the non-GAAP or adjusted tax rate was in the quarter? Mostly that might have been a little bit lower than it usually has, and I'm wondering if there were any one-time impacts in there?

Frank J. M. Ten Brink

No, so the as reported for the year-to-date is about 35.9%, and that's what we anticipate the range for the year to be at about that 36%.

James Francescone - Morgan Stanley, Research Division

Okay, great. And then on currency, could you, one, from a high level perspective, what's your approach to managing currency risk, either considering natural or synthetic hedges? And could you give us some sense of what the FX outlook is like for the rest of the year at current rates?

Frank J. M. Ten Brink

So if you think about our business, it's really a service business. So we are naturally hedged in each country. We don't make products in one country and send it to another. Our risk is really consolidation which you don't hedge for. The outlook for the year, it's everyone's crystal ball. We really look at where rates are right now, trying to not get too fancy in the future. We do think, if you think about the rest of the year, there was about $23 million added from a point of view of acquisitions. It definitely in the second half will have a little bit of an impact because the euro has certainly dropped a little bit. So in the guidance setting, it probably was about a $13.5 million impact versus our previous guidance.

Operator

Your next question comes from the line of David Manthey from Robert W. Baird.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

First off, could you talk about your hit rate selling some of these ancillary services to med waste customers that you've had for a while, maybe 2 or 3 years. And if you compare that to your hit rate of acquired customers, let's say, that you've gotten through acquisitions over the past year?

Richard T. Kogler

I mean, I think like we've said for quite a few years, once a customer becomes a Stericycle customer after an acquisition, then we bring them into the fold, introduce them to our services, our sales people begin to contact them. But I can kind of give you an anecdote. I mean, year-to-date right now, I think we've talked about this on some prior calls. One of our multiple services, the Pharma Waste service, where our installations in hospitals are up 20% this year versus last year. And I guess just another anecdote is that our sales team as a whole is running above their internal plan. And you see this reflected in the growth rates for the company, SQ and LQ, which are sort of at the higher end of our range.

David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division

Okay. And second, I was wondering if you could discuss the pace of the mix shift you see from Large Quantity to Small Quantity customers within your international markets. And if you could compare and contrast that with the historical pace of U.S. conversion?

Frank J. M. Ten Brink

A good example of that is the U.K. where right now the SQ is in the low 30s as a percent of revenues to the total revenues for SQ. When we purchased that business, it was nearly only 2% and that was in the '05, '06 timeframe. So that kind of gives you a period of time through which the business has fairly dramatically already shifted. Spain is a good second example. A little too early, but we've done some acquisitions in the SQ sphere, and that has started to build density up and they are definitely ahead of their numbers and on track. So it is working and we'll continue to work the system to make the SQ a larger part of the businesses overseas.

Operator

Your next question comes from the line of Greg Halter from Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

Relative to the operating -- the FX impact, I should say, $8.1 million on sales, what kind of impact did that have on operating income?

Frank J. M. Ten Brink

I mean if you think about our International business, it's predominantly LQ in larger percent, so the impact is far less. Probably about at the end, somewhere in the area of $0.01 to $0.02, if you think about it from an entire year point of view in the guidance. So what we had is 3 24 to 3 28 before $0.01 to $0.02 is the impact on a full-year basis.

Gregory W. Halter - LJR Great Lakes Review

Which is a negative impact, correct?

Frank J. M. Ten Brink

That is correct.

Gregory W. Halter - LJR Great Lakes Review

Okay. And just wondered if you could provide any insights into what you're seeing competitive -- on a competitive nature either domestically, or I should say, and domestically, as well as internationally?

Richard T. Kogler

Well, I think you, as you've heard us say many times, it's a very competitive business with a lot of competitors large and small. That being said, we continue to manage our way through. And our sales team does a good job. And I, again, I think you see it in our growth rates. But this is a business where people will always be looking to try to enter, and that's the American way.

Operator

Your next question comes from the line of Shlomo Rosenbaum from Stifel, Nicolaus.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Just to follow-up on a question that was just asked. The currency headwinds are affecting your guidance negatively by $0.01 to $0.02 for the year, is that correct?

Frank J. M. Ten Brink

That is correct.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

And am I understanding this right, that the tax rate guidance went from $0.37 to $0.36, which is a positive impact of what, $0.04 to $0.05?

Frank J. M. Ten Brink

Now if you looked -- we, last time, said in the guidance that the tax rate was somewhere in the mid-36s, and now it's about 36 for the year. You may and did get $0.01 out of that in Q2. A little bit just on a year-to-date basis, that probably is half a penny to $0.01 in the second half. And then you have your acquisitions that are adding $0.01 to $0.01 and thatkind of upsets the $0.01 to $0.02 headwinds on the foreign exchange.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

So if I'm looking is for, instead of a ding of 37 being 36.5, so that's about a good two and half cents, so you assume that, that's kind of a little bit more than what we're getting or roughly the same as what we're getting from offsetting the FFX, is that right?

Frank J. M. Ten Brink

I don't think the math is right that you're doing because in the first quarter we were a little bit below the 37, and at that point the guidance that we had set was, let's say used the mid-36s.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. I'll go back to that. Then can you just give some of the dynamics on what's going in SG&A. The gross margin's obviously moving up, and you're seeing the EBIT margin moving down. I was wondering, is there a timing of acquisitions? You did a lot more acquisition this quarter than the last quarter. Are we seeing some of the timing impact the SG&A that's moving the margin down?

Frank J. M. Ten Brink

Yes, we did have the investment in our large retail and healthcare contracts that are kind of starting up. The acquisition mix impacted debt slightly from a percentage. And then we did, because we were ahead of the game, did some strategic investment spend in growth initiatives.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Could you just give us an example of what strategic investment spend might be?

Frank J. M. Ten Brink

Well, those are investments in our programs like Steri-Safe and factors of how we can make improvements in our business. There's always a list of activities that we have that we would like to do, but we want to be sure that they're not totally negatively impacting that we're doing, trend-wise.

Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay, and in terms of the acquisition revenue contribution, I think someone might have alluded to this earlier. I'm seeing just the last 3 quarters, kind of a decline, is that on a sequential basis? Is the right way to look at that, that things are just bumpy and you don't close acquisitions in -- on a straight-line basis. Or is it really just the pipeline of acquisitions is changing? Or the ones you're going after are smaller?

Frank J. M. Ten Brink

No, I think you need to look at 2 different numbers. So in the quarter, the contribution to growth was $36.6 million. That's the difference between how much the revenues were on acquisitions that have not been yet in the business for 12 months between last year and this year. In the quarter itself, we had $46.5 million in revenues and acquisitions. But in the prior year, there was $9.9 million. A lot of that was attributable to the HWS transaction. So the contribution to growth is $36.6 million, but in the quarter itself, it was $46.5 million.

Operator

Your next question comes from the line of Kevin Steinke from Barrington Research.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

I just wanted to follow-up on energy a little bit and with fuel prices coming down recently, does that have any impact on your outlook for fuel surcharges in the second half of the year, or is it not a material enough a move to make a difference there?

Richard T. Kogler

Well, energy was down just slightly from 5.8% to 5.6% of revenue for the revenues that are affected by transportation for the quarter. We have surcharges that are tied to our contract language. And of course as fuels decline, then the surcharges would tend to roll off. And I guess it's anybody's guess though what fuel's going to do. So if it moves up, our contracts also give us the flexibility to deal with that.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. And then internationally, are you still in the process of renegotiating or discontinuing LQ contracts that are lower margin and kind of how far along are you in that process? Or is that just kind of an ongoing process?

Richard T. Kogler

No, it's actually an ongoing process, because you're dealing with large customers and there's contract terms. And as we kind of work through the process a while back here in the States, it's something that takes place over time. And then as you acquire new contracts, you continue to work through those, so would I guess, I would characterize it as ongoing.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. But there is not necessarily a large chunk right now that you'd like to work through and then that eventually tapers off, and it's just more one-offers?

Richard T. Kogler

it's a continual program, and as I said, as new contracts come into the fold, through acquisitions will work those too.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Great. Okay, one last one. I'm wondering if you have any breakout on LQ versus SQ for the regulated waste acquisitions that were done during the quarter?

Frank J. M. Ten Brink

It was about 58%, 60% SQ and 42% LQ.

Operator

Your next question comes from the line of Richard Close from Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

Just really a quick couple of questions here. On the pharmaceutical waste, if you can just update us again on the market size there and where you think, in terms of revenues, where you -- how far you're penetrated?

Richard T. Kogler

Well, I think the market, as we said before, is equivalent or larger than the Biosystems market. Which means it's probably $200 million-plus. We continue to have good success, and see high demand. This is also program that may have applicability in other international markets. So I think from a penetration standpoint, we still have a lot of runway.

Richard C. Close - Avondale Partners, LLC, Research Division

And just to be clear, when you said, I think you mentioned the hospital market, you're up 20% or so year-to-date with -- in the Large, I guess, Large Quantity of pharmaceutical waste. Are you doing anything with local governments? I know you talked a little bit about this earlier. Are you doing any type of contracting with local governments?

Charles A. Alutto

Yes, we do a little bit on the SQ side of the house where we have some doctors that have some pharmaceutical waste. We do have a program for that, that's included in the SQ growth. Some municipalities, on some of their hazardous waste collection days, we're contracted to take away some of those pharmaceuticals. It's not a big part of the business. We also handle pharmaceutical waste coming out of pharmacies and retail chain customers. So there's other opportunities. The big one right now is in the hospital space. We think it's one of the bigger markets, and that's why we spent a lot of time focusing on that part of the business.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, and then with that being up 20% year-to-date? I'm curious, as contracts, Large Quantity contracts or hospital contracts come up for bid, how would that -- what percentage when you renew a contract or rewin one, what percentage are you selling multiple services here domestically?

Charles A. Alutto

So our multiple services -- yes, our multiple services domestically, we're -- those services are available to all of our hospitals. So it's not when a renewal comes up. With respect to, when a renewal comes up, these are normally separate contracts, so we have a separate contract for regulated medical waste, a separate contract for pharmaceutical waste, for our sharp service. So that's not really, when we're waiting for the renewal, for an opportunity to sell the additional services to that customer.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay. I guess I'm trying to get a feel of how much the market is going to a fully bundled service offering and how that is developing in terms of the full bundled services?

Richard T. Kogler

I don't think it's a bundled service in the classic since of that term. As Charlie just said, these are multiple services that customers can opt to take individually or they can take all 3 or all 5 or whatever we're offering. We're not bundling, and I don't really see the market going to a bundled mode. That's just -- that's how we're seeing things right now.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay. And one final question. I know we've had a lot here, but with the acquisition revenue that you guys called out, you mentioned something with respect to recalls, was there an acquisition on the Returns Management Recalls business?

Frank J. M. Ten Brink

No. The one that we mentioned is sometimes needed to calculate the internal growth matters, so that's why I gave the number, but this is an acquisition that was done in prior quarters.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Charles A. Alutto

Great, thanks, Mike. I want to thank everybody participating on today's call. Enjoy the rest of the summer. And we'll speak to everybody again in October. Have a great night.

Operator

This concludes today's conference call. You may now disconnect.

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